7 Figure 2 shows the classification of selected countries based on their tax effort and tax
collection.
22
China, Indonesia and Thailand are considered to be low tax collection, low tax effort.
Figure 2: Classification of selected countries based on tax efforts and tax collection, 1994-2009 Classified
1994- 2009
Tax Effort Low
High
T a
x Co
ll ectio
n Low
37 countries including China, Ethiopia, India, Indonesia,
Japan, Mexico, Thailand and the United States.
12 countries including Cote dIvoire, Ghana, Kenya, Mali,
Pakistan, Sri Lanka, Togo and Zambia
H igh
20 countries including Bulgaria, Estonia, Germany, Latvia,
Russia, Spain, Switzerland, and Turkey
34 countries including Australia, Botswana, Brazil, France,
Netherlands, New Zealand, South Africa and the United
Kingdom Source: Adapted from Tuan Minh Le, Blanca Moreno-
Dodson and Nihal Bayraktar, ‘Tax Capacity and Tax Effort: Extended Cross-
Country Analysis from 1994 to 2009’ WPS6252, Policy Research Working Paper 6252, Investment Climate Department, The World Bank, October 2012 25.
The classification of China, Indonesia and Thailand in to the “low tax collection and low tax effort” category suggests a number of challenges and reform opportunities
that may enable those countries to improve their tax revenue raising capacity and to enable them to raise those taxes in a more efficient and effective fashion. More
particularly such countries can seek to make improvements in the quality of governance in the broadest sense, particularly through the control of institutional
corruption; and seek to improve the tax administrative functions of government, particularly through appropriate re-organisation, through tackling evasion and the
shadow economy and through minimising the operating costs of the tax system. Each of these challenges is now explored in greater detail
– broad governance issues in Section 2, and tax administration issues in Section 3.
3. Governance
Governance is broadly defined as the traditions and institutions that determine how authority is exercised in a country.
23
As noted by former United Nations Secretary- General Kofi Annan: “Good governance is the single most important factor in
eradicating poverty and promoting development”.
24
22
Adapted from Le et al, above n 11, 25.
23
Daniel Kaufmann, Aart Kraay and Pablo Zoido- Lobatón, Governance Matters: From
Measurement to Action Finance and Development.
24
UNDP, uman Development Report United Nations Development Programme, New
York, 2002 51.
8 The literature posits a positive correlation between the quality of institutions and
governance structures on the one hand and economic growth on the other.
25
Notwithstanding the Asian Financial Crisis of 1997, the last three decades have seen an economic transformation in most Asian countries. Yet good governance has not
always kept pace with this economic growth. Given that good governance is closely associated with economic growth, continued sustained economic growth may be
constrained by a lack of good governance. This point is critical to all three countries under consideration.
For example, within three decades, China has transformed itself from a centrally- organised, closed economy to a market-oriented open economy. China is now the
second largest economy in the world, with GDP accounting for about 10 per cent of
the world’s total.
26
This rapid growth brought with it significant macroeconomic, environmental and social challenges.
China’s governance and institutions will be key to ensuring that it continues to reform and strengthen, and yet to date there are serious
concerns about the quality of the country’s institutional arrangements and their capacity to cope with such fundamental change.
In Indonesia there is widespread agreement that corruption has been inhibiting economic growth.
27
Although much has been said about eliminating corruption, there is little evidence to suggest that progress is being made.
28
Indeed the recent case of a relatively junior tax official has highlighted the ineffectiveness of the anti-corruption
campaign.
29
Genuine progress in eliminating corruption requires an investment in good governance.
The institutions that provide public services, such as revenue authorities, and the way they interact with citizens, are fundamental components of governance. Indeed, the
quality of governance is generally judged through the experience of public service delivery.
30
Similarly, weak governance is often to blame for public service failures, with corruption and the lack of transparency attracting the most attention.
31
A study published by the Asian Development Bank on the effect of governance on tax revenue
25
See for example Stephen Knack and Philip Keefer, nstitutions and Economic Performance:
Cross Country Tests Using Alternative nstitutional Measures 7 Economics and Politics
207-227; Paolo Mauro, Corruption and Growth
Quarterly Journal of Economics 681-712; Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert
Vishny, The Quality of Government
Journal of Law, Economics and Organisation 222-279; Kaufmann et al, above n 23.
26
Ligang Song, Asia s Economic Transformation: mplications for Australia – China Policy Briefs 10, Crawford School of Economics and Government, Australia National University, April
2011
27
uiyan Zhang, Corruption, Economic Growth and Macroeconomic Volatility Perspectives.
28
Ross McLeod, Asia s Economic Transformation: mplications for Australia – ndonesia Policy Briefs 10, Crawford School of Economics and Government, Australia National University,
April 2011.
29
For a report on the full allegations see Olivia Rondonuwu, Game over for corrupt, wig-wearing ndonesian tax official Reuters, January
.
30
ASB, Asian Development Outlook Update: Governance and Public Service Delivery
Asian Development Bank, 2013.
31
Ibid, 79.
9 mobilisation concluded “the tax revenue mechanism is particularly strong”.
32
Thus governance and the quality of institutions go hand in hand.
The Worldwide Governance Indicators
33
report on a number of categories of governance including government effectiveness and the control of corruption. Both
of these are considered in turn. Government effectiveness
‘Government effectiveness’ is a measure of the perceptions of the quality of public services and the degree of independence from political pressures, and the quality of
policy formulation and implementation as well as the credibility of government’s commitment to such policies. The results in Figure 3 from the Worldwide
Governance Indicators are shown as percentile ranking. Percentile ranks indicate the percentages of countries worldwide that rank lower than the country being assessed.
Higher values indicate better governance scores.
Figure 3: Government effectiveness 2002-2012
Note: The ASEAN average includes Indonesia and Thailand Source: Worldwide Governance Indicators
Figure 3 shows that over the period from 2002 to 2012, China marginally and Indonesia more so improved with respect to government effectiveness. While
Thailand went backwards on this indicator, it is nevertheless perceived as performing better than both China and Indonesia. The percentile ranking for the average of
OECD and ASEAN countries has been stable over the decade. Research has indicated that there is a negative correlation between institutional
quality and tax evasion.
34
In other words, the higher the quality of institutions, the lower the levels of tax evasion. For a tax system to generate compliance, the
governing institutions must be credible, equitable and fair and represent the values of society. The evidence from China, Indonesia and Thailand suggests that improving
the effectiveness of government will continue to be a key challenge for these
32
Kunal Sen, Governance and Development Outcomes in Asia Asian Development Bank, Economics Working Paper Series No. 384, January 2014, 13.
33
See http:info.worldbank.orggovernancewgiindex.aspxdoc
.
34
Benno Torgler, ncreasing Tax Compliance in Papua New Guinea National Research nstitute,
Tax Research and Review Symposium, Port Moresby, 29-30 May 2014, 27.
10 countries in coming decades, and that further improvements can have a significant
and self-reinforcing impact on the legitimacy of government and on revenue raising capacity.
Corruption
“Corruption” is defined as “the abuse of entrusted power for private gain”.
35
The Transparency International Co
rruption Perception Index is based on experts’ opinion of government corruption. On a scale of 0 highly corrupt to 10 very ethical, most
developing Asian countries scored below 5 in 2011, roughly the same as in 2001.
36
This is shown in Figure 4. While China 2011: 3.6; 2001: 3.5 and Thailand 2011: 3.4; 2001: 3.2 have remained relatively steady over the decade, Indonesia has
apparently improved substantially from a score of 1.9 in 2001 to a score of 3 in 2011. However, it has slipped in the rankings from 88 in 2001 to 100 in 2011. This shows
that, relative to other countries, Indonesia has not made as much progress as its improved score might otherwise suggest.
Figure 4: Corruption perception index, 2001 and 2011: various countries
Source: Transparency International, Corruptions Perception Index 2011, 2001.
The Worldwide Government Effectiveness Indicators also provide an assessment of the levels of corruption in various countries. Figure 5 shows a similar pattern to the
‘government effectiveness’ indicator. China has fluctuated over the period, commencing in 2002 at 34 per cent, increasing to 43 per cent the following year
before finishing 2012 at 39 per cent. Indonesia steadily improved from a position in the lower 10 per cent of all countries in 2002 to 29 per cent in 2012. Thailand
35
Transparency International, available at www.transparency.orgwhatwedo
accessed 3 May 2014.
36
Transparency nternational,
Corruptions Perception
ndex available
at www.transparency.orgresearchcpioverview
accessed 3 May 2014. 2
4 6
8 10
2011 2001
11 remained relatively consistent over the ten year period, but performed better than both
Indonesia and China, starting and ending marginally below 50 per cent. Once, again, the OECD average has been stable over the decade and well above the ASEAN
countries, while the overall ASEAN average improved by 3 percentage points to 42 per cent in 2012.
Figure 5: Control of corruption 2002-2012
Note: The ASEAN average includes Indonesia and Thailand. Source: Worldwide Governance Indicators.
High levels of corruption are associated with increased activity in shadow economies
37
and higher income inequality and poverty.
38
Tanzi notes several situations in which corruption is likely to be a problem in tax administration.
39
These include difficulty in understanding and interpreting tax laws, lack of electronic tax
payment systems, lack of management controls, poor accountability mechanisms and tax administrators having discretion over important decisions such as those related to
the provision of tax incentives, determination of tax liabilities and selection of audits. These aspects are elaborated upon in Section 4 of the paper.
Challenges and opportunities One of the greatest challenges for developing nations is the need to build state
capacity and legitimacy so that appropriate revenues can be raised from their own resources without having to rely on foreign aid and investment. But the raising of
revenue also needs to reflect the interaction of policy such as efficiency and growth with social interests such as equity and fairness. Government stability and
legitimacy is necessary to implement policies that aim to increase economic performance and reduce income inequality. Where political interests dominate,
37
Benno Torgler and Friedrich Schneider, The mpact of Tax Morale and nstitutional Quality on
the Shadow Economy Journal of Economic Psychology 228-245; Eric Friedman, Simon
Johnson, Daniel Kaufmann and Pablo Zoido- Lobaton, Dodging the Grabbing and: The
Determinants of Unofficial Activities in Countries Journal of Public Economics 459-
493.
38
Sanjeev Gupta, Hamid Davoodi and Rosa Alonso- Terme, Corruption and the Provision of
ealth Care and Education Services in George Abed and Sanjeev Gupta eds Governance, Corruption and Economic Performance International Monetary Fund, 2002 458-486.
39
Vito Tanzi, Corruption Around the World: Causes, Consequences, Scope and Cures in George
Abed and Sanjeev Gupta eds Governance, Corruption and Economic Performance International Monetary Fund, 2002 19-58, 28.
12 politically fragile states are constrained in their ability to act without fear or favour
when attempting to be more efficient and effective.
40
Several factors can assist in limiting the abuse of political power such as education, a free press and well-
functioning and accountable institutions. China has had to deal with a rapidly expanding economy. This increased reliance on
market-based policies has meant that the governance structures and institutions need to be substantially reformed for this growth to be sustainable. As a result China has
implemented major tax reforms over the last two decades, including significant measures to improve governance in taxation.
41
Indonesia began its institutional reform in 1998 and has transformed itself into a relatively open, stable and democratic nation.
42
It has also made substantial progress in upgrading its institutions, and in particular tax administration, in the last decade.
43
However, a number of tax-related cases in 2010 and 2012 involving tax administrators have undermined the level of public trust not only in the tax institution
but in the tax administration reform process.
44
Political commitment requires strong, receptive and sustained support. Public sector reform also commenced in Thailand in the late 1990s, including a new constitution in
1997. There were essentially three aspects to the reforms: improving governance, efficiency and equity; enhancing accountability and transparency of resource
management and delivery; and increasing decentralisation and public participation.
45
Institutional capacity was enhanced through the establishment of new institutions such as the Large Taxpayer’s Office, the National Counter Corruption Commission
and the Administrative Courts. Yet reform is an ongoing process. Governance in tax administration can be improved
by strengthening transparency and accountability mechanisms. Integrity is an essential element of good institutional performance. While much has been achieved
in China, Indonesia and Thailand, there is still scope for improvement in the areas of increasing transparency and accountability or government effectiveness,
establishing a level playing field, reducing corruption and improving service delivery.
40
Richard Bird, Tax Challenges Facing Developing Countries B Paper No. , nstitute for
International Business Working Paper Series, University of Toronto, 2008.
41
OECD, Governance in China OECD, 2005.
42
Dan arris and Marta Foresti, ndonesia s Story: ndonesia s progress on governance: State cohe
sion and strategic institutional reform Overseas Development nstitute, .
43
OECD, OECD Economic Surveys: Indonesia 2012 OECD, 2012.
44
Ibid.
45
World Bank, Thailand. Country Development Partnership: Governance and Public Sector Reform Program Assessment and mplementation Completion Report, December
.
13
4. Tax administration
